Hi All,
With regards to CGT in relation to subdividing a block and building two properties (one as a PPR and the other as an IP), I've been told by several people now that come tax time the ATO will only consider the cost associated with the construction of the IP as a cost base. Does this mean to say that on paper my gain/profit will be greater than in reality, as in reality I'll actually have incurred an extra cost (not considered by the ATO) in relation to building the PPR, as well?
The way I see it is that the ATO will say I have X amount of dollars after Sale Price of IP – Cost Base (of IP only), when really it'll be Sale Price of IP – Cost Base of 2 properties. If I take out a loan (a cost) to cover the construction of both properties, of $500K, then that's what I need to repay the bank when the IP is sold. The cost base, though, will be $250K for the IP. I sell the IP for $700K, and from the info I've gotten so far, that's to say I'll be taxed on $700K – $250K = $450K. In reality, though, I'll only be getting $200K after I pay the $500K loan, so how can they tax me on $450K when I'll have access to a $200K gain only? An "invisible" cost to the ATO (re: PPR), but a real one to me!
Sorry if I was confusing with my post, but really need some advice on this! It's hard to say who I should consider pleasing first – the bank by repaying the full debt or the ATO by having sufficient funds to pay them at the end of the financial year?
Thank you!
you should also consider that you are borrowing to build a PPOR property. This is not deductible.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
shangrila00 wrote:Hi All,With regards to CGT in relation to subdividing a block and building two properties (one as a PPR and the other as an IP), I've been told by several people now that come tax time the ATO will only consider the cost associated with the construction of the IP as a cost base. Does this mean to say that on paper my gain/profit will be greater than in reality, as in reality I'll actually have incurred an extra cost (not considered by the ATO) in relation to building the PPR, as well?
The way I see it is that the ATO will say I have X amount of dollars after Sale Price of IP – Cost Base (of IP only), when really it'll be Sale Price of IP – Cost Base of 2 properties. If I take out a loan (a cost) to cover the construction of both properties, of $500K, then that's what I need to repay the bank when the IP is sold. The cost base, though, will be $250K for the IP. I sell the IP for $700K, and from the info I've gotten so far, that's to say I'll be taxed on $700K – $250K = $450K. In reality, though, I'll only be getting $200K after I pay the $500K loan,
Loan is 250k for the IP and 250K for PPR
You need to take into account the land value as part of the cost base.
Also the holding costs of loan interest can be added to the cost base known as third element of cost base.
Also read second element as you may have incurred these costs also !
see http://www.ato.gov.au/individuals/content.asp?doc=/content/36557.htm&page=2&H2So Capital Gain = 700k – 250k – (50% of total land original value when you bought it due to subdivision)
shangrila00 wrote:so how can they tax me on $450K when I'll have access to a $200K gain only? An "invisible" cost to the ATO (re: PPR), but a real one to me!Are you selling PPOR for a 700k Profit ?
Your getting the PPOR part of the loan being paid off from selling the IP without selling the PPOR !
You will have to also deal with GST when you sell the property. !!shangrila00 wrote:Sorry if I was confusing with my post, but really need some advice on this! It's hard to say who I should consider pleasing first – the bankThe bank is charging you interest on the loan !
shangrila00 wrote:by repaying the full debt or the ATO by having sufficient funds to pay them at the end of the financial year?You do not pay 100% CGT at worst 40% of gain.
Duckster,
Yes, the intention is to pay off the entire loan (both for the IP and PPR) by selling the IP only and keeping the PPR. The PPR on the land at the moment is fully paid off, and we don't intend on obtaining a loan for that house only, separate to the IP.
It's still not clear to me, after having paid off the loan (which will be secured against the IP only), how I'll have access to enough funds for CGT purposes. Or at least sufficient to call this a profitable exercise. So the funds from the IP sale, on paper, will be more than what will be left, as the PPR part of the loan will also be paid off.
I know the PPR part of the loan is not tax deductible, but with one property on one loan, the bank will want its full amount back upon IP sale.
That's my main concern!
You are essentially just selling half of your holdings, so will have a large amount of equity built into the remaining one.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw, yes, you're right, but I'm not sure how this helps in this case? We don't want to take out another loan against the equity in the PPR to pay for CGT.
I just reread you posts and I think it may not work like you are suggesting.
For a start if you have a vacant block of land now, it may not qualify as the main residence (as there is no residence). But maybe this won't make a different as you will be moving into one later after it is completed.
Then say the land is worth $500,000, only half of this (or whatever % portions you actually use) will be for the investment property.
So $250,000 for land
$250,000 for build
= $500,000 cost base plus some other costs (stamp duty, legals etc)sell for $700,000
= $200,000 profit
50% CGT discount (if held more than 12months)
= $100,000 CGTThis is added to other income, so max tax payable if you were on the top rate would be $48,000.
It will actually be less as you can take into account interest, rates etc and other holding costs.Also you must consider GST. Because you are selling a new property you must charge the purchaser GST, another $50,000 less GST paid for on construction, $25,000 = $25,000
All up abotu $70,000 maybe.
Assuming you own the land out right, you will have a loan of $500,000, and then sell one property, with the remaining property being $700,000 in value = 71% LVR. You will then have $700,000 cash in your hand, less costs.
But really half of the loan will be for the IP and half for the PPOR, so $250,000 loan each. Because it will be on one title until settlement of the sub-division it will have just one security, but I think you should stil split the loan into 2 to take advantage of the fact that half the costs are for the investment.
Then at sub-division you will have 2 loans with 2 properties. $700,000 value each with $250,000 in loans each. Sell 1 and you will discharge the $250,000 loan B, you will have $450,000 in cash. You can take $70k for taxes and still have $380,000. Use this to pay off the remainng loan if you want and still have $130,000.
These are rough calcs and are probably wrong as I am watching a movie while typing, but you may get the general idea.
Tax on sub-dividing is very complex. I can't understand it all either. For some good info see http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf
And before you start doing anything I suggest you get some expert advice in writing. One mistake could cost you tens of thousands of $$ so it is worth paying for some advice.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw, thanks for the info! You've given me a different way of looking at this.
From a loan point of view, though, I personally thought it'd be safer to just offer the IP as security on the loan and keep the PPR separate (not mortgaged), as it's already paid off to begin with (it's not just a vacant block of land, there is a property there at the moment). I guess getting one loan for the PPR and one loan for the IP keeps things simple and clean, but why risk the PPR by mortgaging it and putting it as security on a loan?
Thanks again!
Is subdivision possible before the new houses are constructed? I thought that maybe you would have to build first before the new title is issued.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Subdivision will occur first, building, then new CT's. It won't be any different to most of the other developments out there. I guess the issue would be how to structure the loans (one against the IP only for both IP and PPR costs, or one against each property), so we can put money aside for tax purposes first, then worry about paying off the PPR loan second.
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